Final answer:
The year-end adjusting entry for bad debts using the allowance method increases the allowance for doubtful accounts and decreases both net income and the value of accounts receivable, which are assets.
Step-by-step explanation:
When we do the year-end adjusting entry for bad debts using the allowance method, both the assets and net income are affected. Under the allowance method, a contra asset account called Allowance for Doubtful Accounts is used to estimate the amount of bad debts. The adjusting entry increases the Allowance for Doubtful Accounts, which in turn decreases the net income and the value of accounts receivable, which is an asset.
For example, let's say a company had $10,000 in accounts receivable and a related credit balance of $500 in the Allowance for Doubtful Accounts. After reviewing the accounts, the company decides to increase the allowance by $1,000. The adjusting entry would be to debit the Bad Debts Expense account for $1,000 and credit the Allowance for Doubtful Accounts for $1,000. This decreases the company's net income by $1,000 and the value of accounts receivable by $1,000.
In summary, when we do the year-end adjusting entry for bad debts using the allowance method, it increases the allowance for doubtful accounts and decreases both the net income and the value of accounts receivable, which are assets.